Post on 06-Dec-2014
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Insurance
Coverage for
Litigators
▪ ▪ ▪ The Nuts & Bolts
Belo Mansion
June 17, 2011
Your client who has been sued may need help identifying
all of the potentially pertinent policies
Most insurance policies require prompt notice of a claim
or lawsuit – delayed reporting can complicate things
even in situations where it is not a defense to coverage
Coverage issues may impact your case strategy – for
both plaintiff’s counsel and defense counsel
If there is a dispute over coverage,
your client may be entitled to
independent counsel
Better to involve coverage counsel
sooner rather than later
Why is Coverage Important?
And the #1 reason you need to understand the basics of
insurance coverage …
Why is Coverage Important?
Anatomy of an Insurance Policy
Declarations Insured
Policy Number
Policy Period
Limits of Liability :: Per Occurrence / Claim & Aggregate
Deductible or Self-Insured Retention
Coverages
Schedules
Policy Form(s) Insuring Agreement
Exclusions
Definitions – of critical importance
Conditions
Endorsements Can change practically anything – read them first!
Common Liability Insurance Policies
Commercial General Liability
Commercial Auto Liability
Directors & Officers Liability (D&O)
Fiduciary Liability (ERISA fiduciaries)
Employment Practices Liability (EPL)
Professional Liability / E&O
Lawyers
Accountants
Banks
Real Estate Agents
Broker-Dealers
Architects & Engineers
Insurance Agents
Doctors, Hospitals, Other Medical Providers
Common Liability Insurance Policies
Commercial General Liability (CGL)
Property damage
Bodily Injury
Personal Injury
False arrest, detention, imprisonment
Malicious prosecution
Wrongful eviction
Advertising Injury
Libel, slander in publication
Invasion of privacy
Use of another’s advertising idea
Copyright infringement (sometimes)
Common Liability Insurance Policies
Employment Practices Liability (EPL)
Claims arising from “Wrongful Employment Practice”
Wrongful discharge, wrongful termination
Employment-related defamation, misrepresentation,
invasion of privacy, infliction of emotional distress
Sexual harassment
Violation of Title VII, Americans with Disabilities Act, Age
Discrimination in Employment Act, Civil Rights Act, etc.
Failure to employ or promote
Failure to adopt adequate workplace policies and
procedures
Common Liability Insurance Policies
Employment Practices Liability (EPL)
Common Exclusions
Property damage | bodily injury (need CGL)
ERISA violations (need fiduciary)
Workers compensation, OSHA, Fair Labor Standards Act
Cost of non-monetary relief
Cost of providing accommodation
Cost of providing benefits
Common Liability Insurance Policies
Professional Liability | Errors & Omissions
Claims arising from “Wrongful Acts”
Generally in the rendition of “Professional Services”
Definition of “Professional Services” often the key
Litigation Scenarios that May Trigger Insurance
Case Facts: Your client, Albert Architect, was engaged by
an oil tycoon to adapt model drawings for 12 new
convenience store locations in Oklahoma. Albert is later
sued for copyright infringement by the architect of the
original plans.
CGL
May be covered under “advertising injury” or “personal and
advertising injury”
May exclude for professional services
May exclude for copyright infringement, but beware of
inconsistent endorsements that modify the policy
Architects E&O / professional liability
May also exclude for copyright infringement
Litigation Scenarios that May Trigger Insurance
Case Facts: Your client, Bob the Builder, was hired to
design and construct the foundation for a new football
stadium, including all grading and prep work. The week
before the first game, cracks in the foundation suggested a
problem.
CGL May not provide coverage for Bob’s defective
installation, but collateral damage to other
property may be covered
May exclude for professional services
Architects & Engineers E&O /
professional liability May provide coverage for engineering errors
and omissions in the project design
When is Coverage Triggered?
Claim, Occurrence or Offense during policy period
Occurrence => “accident”
Offense => personal and advertising injury
Claim is often defined in the policy :: the definition matters
Almost always includes a lawsuit or the filing of a petition
or complaint
Often includes a written demand for money or services
May include a governmental investigation – SEC or DOJ
May extend to a subpoena to give testimony or produce
documents (or insurer may elect to provide coverage in
order to mitigate risk)
Notice & Cooperation
Give notice – as the first order of business!
If policy says “as soon as practicable,” insurer must show prejudice
If policy says “within X days,” will be enforced
Follow policy’s instructions
If help is needed, call the broker
Cooperation clause ::
Read the cooperation clause, follow it
Respond to requests for information
Don’t admit liability
Don’t make any commitments to pay
Don’t settle without carrier consent (unless coverage is denied)
How Will the Insurer Respond?
Accept coverage unconditionally
Deny coverage
Provide a defense under a “reservation of rights” –
required to preserve defenses
When insurer provides a defense, it takes control :: if it
wants to deny coverage later, it must have identified its
coverage defenses in an ROR letter or those defenses are
waived
How Will the Insurer Respond?
If insurer accepts coverage, celebrate!
If insurer denies coverage, your client should consult with its
broker and may consider calling coverage counsel for advice
If insurer sends an ROR:
Ask your client for a copy – even if you can’t advise on coverage, you
should probably know the issues
Respond to requests for information in a timely manner; lack of
cooperation could compromise coverage
If coverage defenses are based on misinformation or misunderstandings,
set the record straight
If coverage defenses overlap with the issues in the lawsuit, may be
entitled to independent counsel
Insurer’s Obligations Under Policy
Provide a defense or reimburse defense costs – may be
inside or outside of limits
Indemnify the insured against an adverse judgment
Act reasonably in responding to a settlement opportunity
– Stowers
Insurer’s Obligations Under Law
Insurance Code governs insurer conduct
Pay when liability is reasonably clear
Avoid unfair or deceptive conduct
Act in a timely manner to:
Acknowledge claim
Provide coverage position or request additional information
Consider additional information
Pay
TIP :: if you are the insured or defense counsel, forward defense
invoices to the insurer as incurred to trigger the 18% penalty
interest for failure to pay defense costs timely
The “Reservation of Rights”
Insurer reserves its right to deny coverage in reservation
of rights letter (“ROR”) addressed to insured
ROR is based on the policy terms, limitations on coverage
that the insurer believes are applicable to the case at
hand
ROR preserves insurer’s right to withdraw defense at a
later time and to refuse to indemnify non-covered claims
Insurer assumes control of defense and settlement
Insurer selects and pays defense counsel
Insurer monitors litigation to determine whether duty to
defend exists and scope of duty to indemnify
Purpose of Reservation of Rights
In Texas, the ROR is necessary to preserve the carrier’s
coverage and policy defenses
Allows the insurer to deny coverage even after it has
assumed defense of the underlying lawsuit
ROR is designed to put the insured on notice of the
insurer’s position regarding coverage
Allows the insured to identify potential conflicts of
interest and act accordingly
Purpose of Reservation of Rights
When an insurer assumes the defense of an underlying
lawsuit, it is in a position to steer the case away from
coverage, to the insured’s detriment conflict of interest
To give the insured fair notice of the insurer’s position and any
associated conflicts, the ROR must be specific
“Insurer reserves all rights available to it under the policy and
under applicable law” is virtually worthless
This type of general reservation often appears in the
acknowledgement letter and may also appear as a catchall
phrase after specific reservations in a proper ROR
Such a general reservation itself has practically no effect
Purpose of Reservation of Rights
CRITICAL :: the ROR gives the insured an opportunity to identify
conflicts of interest between it and its insurer
EXAMPLE
If an underlying lawsuit alleges negligence, fraud and breach of
contract (as may be the case not only in business tort cases, but
also in the professional liability context), negligence may be
covered, but breach of contract and fraud may not be covered
If the coverage issues or defenses overlap with the merits of the
underlying case, there may be a significant conflict of interest –
for example, the insurer may be motivated to demonstrate that
the insured’s conduct was intentional, not negligent, in order to
defeat coverage
Adverse Interests … Potential Conflict
Insurer typically controls the defense under duty-to-defend
policy
Defense counsel has access to confidential, non-public
information from her client, the insured
Insurer’s interests are adverse to insured’s interests on
coverage issues
Defense counsel may have a financial
or business incentive to accommodate the
insurer (source of repeat business), which may compromise
duty of undivided loyalty to insured
“[The] so-called tripartite
relationship has been well
documented as a source of
unending ethical, legal and
economic tension.”
—Gonzales, J., dissenting
State Farm v. Traver,
980 S.W.2d 625 (Tex. 1998)
The Tripartite Relationship
Insurer
Insured
Defense Counsel
Conflicts in the Tripartite Relationship
Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973)
Extreme facts = highlight the ethical problem
Insurer filed a declaratory judgment action against
insured, Joe Tilley, seeking determination that Tilley’s
late notice defeated coverage
When underlying lawsuit filed against Tilley, insurer hired
defense counsel to represent him
Conflicts in the Tripartite Relationship
Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973)
While representing Tilley, defense counsel simultaneously
provided services to insurance company developing
evidence adverse to Tilley on coverage issues
Defense counsel did not advise Tilley of conflict
Insurer used evidence developed by defense counsel
against Tilley in the dec action
Appropriate? No, as confirmed by Tilley.
Ethics :: Defense counsel has an obligation to inform her
client of the conflict of interest that exists when the insurer
has reserved rights and its interests are adverse to those
of the client
The Texas Supreme Court recognized at the outset that,
under certain circumstances, an insurer may not insist on
its contractual right to control the defense.
What are those circumstances?
Right to Independent Counsel
Material overlapping conflicts independent counsel
ROR is key to identifying the conflicts
When is an insured entitled to independent counsel in
Texas?
General Rule: If the insured’s liability and the coverage
issues turn on the same facts, the insured is entitled to
independent counsel.
Northern Co. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685
(Tex. 2004).
Right to Independent Counsel
“Every disagreement about how the defense should
be conducted cannot amount to a conflict of interest
within Traver’s meaning. If it did, the insured, not the
insurer, could control the defense by merely
disagreeing with the insurer’s proposed actions.
This is not at all what we contemplated in Traver.”
—Davalos, 140 S.W.2d at 689.
Right to Independent Counsel
Right to Independent Counsel
Ordinarily, the existence or scope of coverage is the basis
for a disqualifying conflict. The reservation of rights letter
creates a potential conflict of interest.
When the facts to be adjudicated in the liability lawsuit are
the same facts upon which coverage depends, the conflict
of interest will prevent the insurer from conducting the
defense.
If, however, the insurer defends unconditionally – no
potential for conflict.
Right to Independent Counsel
Independent counsel = Cumis counsel
ROR gives insured opportunity to evaluate conflicts
If the insured does not recognize the conflict and one arises,
defense counsel has an ethical obligation to raise the issue
and recommend independent counsel
Defense lawyers often more focused on the defense of the
case and getting a good result than on the coverage issues; in
fact, defense counsel may often be unaware of the coverage
issues
TAKEAWAY :: Insureds should raise the coverage issues with
defense counsel; if defense counsel senses a conflict, even a
business conflict, he should recommend independent counsel
or refer the insured to coverage counsel
Allocation of Defense Costs Covered & Non-Covered Claims
Again – the unilateral ROR cannot create rights not in the policy
If the policy expressly permits allocation, policy terms control
If policy does not address allocation, current Texas law requires the insurer to defend the entire lawsuit (although contrary arguments exist)
Takeaway :: Insured should not agree to anything without the advice of coverage counsel
Counsel for the Insured
In order to provide the best representation:
Understand the coverage issues – avoid recommending a
course of action that would defeat or reduce your client’s
coverage
For example, the insured’s interests might not be served by
taking steps to eliminate a covered claim through summary
judgment if it’s the only claim that triggers coverage; if you
succeed, your client may no longer have its defense costs
covered
If you can’t do this because you have a business relationship
with the insurer, you need to advise your client and make
sure you have consent to proceed notwithstanding the
conflict and inherent limitations on your ability to represent
the client’s interests vigorously
Counsel for the Insured
In order to provide the best representation:
This conflict potential should be assessed early to avoid
prejudicing the insured by raising it too late in the game
If there’s a conflict, recommend that insured retain coverage
counsel to work solely on the coverage issues and consult
with you on the defense
Under appropriate circumstances, refer the insured to
independent counsel
Plaintiff’s Counsel?
In order to provide the best representation:
Know the coverage issues; consult coverage counsel
for assistance with strategy to maximize coverage.
Understanding the dynamics of the tripartite
relationship also helps plaintiff’s counsel navigate the
dispute more effectively.
Questions?
Thank you!
Contact
Information
amy@amystewartlaw.com
214.665.9550 (office)
214.316.2623 (cell)
Amy Stewart PC
3333 Lee Parkway, Suite 600
Dallas, TX 75219